By Zhang Liqun

I. Basic Situation of the Macro Economy in China

Chinese economy has demonstrated a rather steady growth in 2001 on the basis of the economic transformation in 2000. The main features include: economic growth rate remains at the same level as that of 2000, price fluctuates slightly at a low level, favorable balance of international payment continues, the situation of unemployment is grim.

1. Economic growth rate remains at the same level of 2000.

The GDP growth rate in the first quarter of 2001 was 8.1%, which is slightly higher than 2000. The industrial growth rate started to decrease in April and May (see figure 1). Supposing this trend continues in June and also taking the decrease of summer grain yield into consideration, the GDP growth of the first half of this year will be expected to slow down, although it will remain close to 8%.

Meanwhile, economic performance have improved distinctly. Industrial enterprises realized 35.1% more profit from January to April than they did in the same period last year.

2. Price keeps in operation at a low level.

The accumulated consumer price index from January to May 2001 increased by 1.1% than that of the same period last year. Analysis shows that the growth is generated by increase in the prices for services as well as for vegetable, fruits, eggs, poultry and freshwater fish. Price for industrial consumption goods continued to decrease steadily. In April, price for household equipment and service, medical care and individual consumption items decreased by 0.3% and 0.1% respectively than that of the previous month. In May, with the drop of price for vegetable, the consumer price index decreased by 0.5 percentage points than the previous month. On the other hand, the ex-factory price for industrial products decreased by 0.1% in April 2001 than that of the same period last year, which means that the price has shown a tendency of decrease since it stopped decreasing and began to rise in January 2001. The ex-factory price for capital goods increased by 0.4% than that of the same month last year. The growth rate dropped by 0.6 percentage points than that in March. All the above shows that price remains to move up and down at a low level and that it is influenced mainly by non-current elements beyond the demand-supply relationship.

3. International balance of payment remains favorable.

Table 1 Balance Between Current Accounts and Capital Accounts in International Payment Unit US$ 1 billion Year 1995 1996 1997 1998 1999 2000 Current Accounts 1.6 7.2 36.7 29.3 15.7 20.5 Capital Accounts 38.7 40 21 -6.3 7.6 19.2

The figures in the above table show that the current accounts and capital accounts in China’s international balance of payment have, for the exception of one year, seen surplus since 1995. The balance is favorable.

The increase of import and export in foreign trade has slowed down obviously since 2001 due to the slow down of the world economy and the high figure of the previous year. Export from January to May increased by 11% with the growth dropped by 25.8 percentage points than that of the same period last year. Meanwhile, import increased by 16.3% with the growth dropped by 19.1 percentage points than that of the same period last year. The trade surplus was US$8.446 billion, which was US$2.012 billion less than the same period last year. In general, foreign trade maintains surplus and the international balance of payment remains favorable. However, it is worth noticing that the amount of surplus is getting smaller.

In terms of foreign investment, the amount of contracted investment was US$20.2 billion from January to April 2001, an increase of 38.3%. The amount of direct foreign investment that has been actually utilized was US$10.9 billion, an increase of 12.4%. Increased foreign investment has become an active element in favour of the international balance of payment.

The foreign exchange reserve of China was over US$170 billion by the end of May 2001, which was US$10 billion more than that at the beginning of the year. The exchange rate of RMB remains stable. In general, the international balance of payment has remained favorable.

4. The situation of unemployment is comparatively grim.

There are now about 16 million people entering the age for labor every year in China, of whom, about 6 million are in cities and townships. However, the average increase of annual employment from 1996 to 2000 was 5.75 million, of which the average increase of annual employment was 3.65 million in cities and townships. The increase of job opportunities is much slower than the increase of population entering the labor market. Moreover, significant restructuring took place among the employed people. Firstly, employees in the second industry moved to the service or agriculture. From 1997 to 1999, employees in the second industry decreased by 2.6 million, whilst employees in the service increased by 6.12 million and employees in the first industry increased by 6.34 million. Secondly, state-owned and collectively-owned economic units in cities and townships transferred to units of other kind of ownership. From 1997 to 1999, employees of state-owned units in cities and townships decreased by 24.72 million, and employees of collectively-owned units in cities and townships decreased by 11.71 million. Against the background of insufficient supply of jobs and significant change in employment structure, the laid-off staff and workers, along with the population newly entering the labour market as well as the floating labor force moving into cities have jointly made the situation of unemployment grim. In 2000, the number of newly increased employed population was 2.6 million, in cities and townships which was less than half of the population that has reached the age of entering the labor market. State-owned enterprises laid off 6.57 million employees in 2000, of whom only 3.61 million were re-employed. These figures show that the grim situation of unemployment has not been improved.

Summing up the above situation, China has maintained its economic growth in 2001 as it did in 2000. However, the contradiction between demand and supply is still outstanding. Price remains moving up and down at a low level. The international balance of payment is favorable. The problem of unemployment is outstanding, which has great impact on social stability. In general, the situation in China’s economy has begun to improve, although there is still a long way to go before the difficulties can be solved.

In order to understand the current economic situation in China, one must know the changes in the background of the economic growth, as well as the new features, new contradictions and new regulation policies and goals in China’s economic growth as a result of the changes.

II. New features and new contradictions in China’s economic growth and new targets for macro economic policies

Along with the framework of socialist market economy set up at an initial stage, and with the economy turning from short of supply to buyers’ market, the economic growth in China has demonstrated some new features and new contradictions. It has also set new targets for the macro economic policies.

1. New features of the economic growth

The economy in China grew by expanding fast in quantity from 1978 to the middle of 1990. The basic features include: Firstly, the economic growth was at a high speed. The average annual growth rate of GDP from 1978 to 1995 was 9.88%. For 17 consecutive years, the economy maintained a growth rate at about 10%, which is rare in the world. Secondly, inflation rate was high. The retail price index increased at an average annual rate of 7.76% from 1978 to 1995, reaching 18.1% and 17.4% from 1988 to 1989 and from 1993 to 1994 respectively. Thirdly, the economic growth rates fluctuate significantly. The biggest drop of GDP growth was once over 10 percentage points from 1978 to 1995 (see figure 2). Fourthly, the quality and results of economic growth was not satisfactory. Different from the above-mentioned economic growth, the basic features of economic growth mode since the middle of 1990s are as follows: Firstly, the speed of economic growth has decreased, the average annual growth rate of GDP in China was 8.26% from 1996 to 2000, 1.62 percentage points lower than that from 1978 to 1995. Secondly, the inflation rate has decreased. The average annual increase of retail price index in China was only 0.26% from 1996 to 2000, the index decreased from 1998 to 2000. Inflation has turned into deflation. Thirdly, the fluctuation of economic growth has smoothed down. The drop of GDP growth has been reduced to 2.5 percentage points (see figure 3). Fourthly, the quality and results of economic growth has improved. The average rate of energy processing and conversion was 70% from 1996 to 1998, 2.6 percentage points higher than the average from 1984 to 1995. The industrial cost/profit ratio for all state-owned industrial enterprises and the non-state ones above certain scale was 2.35 in 1998 and increased to 3.42 in 1999. Profit realized by industrial enterprises above certain scale reached RMB426.2 billion yuan, which is the highest since 1990s.

2. Analysis on the reasons for the change in the features of economic growth

The change in the features of the economic growth in China is mainly due to the following reasons:

(1) In terms of total quantity of commodity and service, short of supply has been replaced by over-supply.

Short of supply that existed for long time in China has almost disappeared since the mid 90s and has been replaced by intensified demand constrain and productivity surplus to different degrees. It is the situation for preliminary buyers’ market. This change means that short of supply has been replaced by over-supply in terms of the total quantity of commodity and service. Short of supply in commodity and service was an important reason for the economic growth mode of simple and rapid expansion in quantity. Over-supply, however, has been an important reason for the new economic growth features. Under the condition of short of supply, producers decide the exchange activities of commodity. The quality, nature and price of commodities are decided mainly by producers. Therefore, producers are able to sell roughly processed products at a high price in order to achieve high profit. As a result, the economy is stimulated to grow rapidly. At the same time, with the fast increase of price, the quality of economic growth is low. Under the condition of over-supply, it is up to the buyers to decide the exchange activities of commodity. The quality, nature and price of commodities are decided mainly by the buyers. Therefore, competition forced producers to improve continually the quality and feature of their products and to lower the prices. As a result, the speed of economic growth will be restrained and price will be lower, hence higher quality of economic growth.

(2) Industrialisation has shifted from the expansion of general processing industry to the upgrading of structural of manufacturing industry.

At times of short of supply, the main target of industrialisation in China was to meet the demand for generally processed products. The main aim of industrialisation was then to increase the scale of the labour-intensive general processing industry. In a buyer’s market, the market competition increases and the market for generally processed products is saturated. Therefore, technological innovation and industrial upgrading are absolutely necessary. Thus, the upgrading of structure of manufacturing and the optimisation of industrial structuring become the main content of industrialisation. General processing industry is characterized by low technology, simply processing procedure, small scale, short investment circle and rapid expansion. All these are major reasons for the economic growth in the mode of simple and fast expansion in quantity. The key reasons for the new features of economic growth lie in the upgrading of manufacturing, the optimisation of industrial structure, the increased demand for technological innovation, specialised co-operation with due division of work, higher demand for scale economy, longer investment circle, higher risk and lower speed of expansion.

(3) The dual pattern of urban and rural economic development is changing into unified development

When industrialisation focuses on general processing industry, the small production scale, simple technology, low demand for specialised co-operation, low investment requirement and quick return have provided good opportunity for the development of rural industry. The mutual support between agriculture and non-agriculture industries result in good development of rural economy and lead to a dual pattern with rural and urban economies developing at different levels. In the industrialisation period of structural upgrading of manufacturing industry and optimisation of industrial structure, it is impossible for industrial manufacturing to continue developing in the countryside due to the expansion of production scale, the complication in technology, the higher demand for specialised coordination, the larger investment, the higher risk and the slow return. It has to move to cities. The related moving of labour force and population towards cities is an important condition for the development of the tertiary industry. The non-agriculturalisation of rural economy began to connect closely with the development of urban economy and with the urbanisation process. The development of non-agricultural industries in the rural area and the industrialisation of the countryside are of a comparatively simple and low quality process. However, it is a comparatively complicated process with higher quality for rural industry to merge into the urban system of manufacturing. Therefore, the first process is a key reason for the simple and rapid expansion of economic growth in quantity, while the second process is a key reason for the new features of economic growth.

(4) Lack of responsibility has shifted into ascertaining of responsibility in economic system and mechanism.

In the period of short of economic supply, the risk in production and investment is quite low because of the active demand for various commodities. Economic system and mechanism focus on stimulating production and investment growth without emphasizing on responsibility. Under the status of a buyer’s market, however, the risk in production and investment is higher. Risk taking has become an important part of economic rules. Therefore, economic system and mechanism began to shift into ascertaining of responsibilities. Lack of responsibility means lack of restraint on economic activities. When there is stimulation without any restraint, economic system and mechanism inevitably become key elements in supporting rapid economic expansion in quantity. When responsibility and restraint on economic activities are emphasized, economic system and mechanism will inevitably become key elements in creating new features in economic growth.

In general, new features of economic growth are the natural result of the following changes, namely change in the relationship between aggregate supply and demand, change in the content of industrialisation, change in the structure of rural and urban economic development, and change in economic system and mechanism. It is worth noting that these are fundamental changes, which lead to profound changes in economic and social relationships and which will take a long time to complete as they are complicated.Economic growth during this process is mainly motivated by a shift in economic structure and system, characterized by gradual change and transition, this is not a stable and standardized mode of economic growth.

3. Major problems faced by the new mode of economic growth

(1) It is difficult to readjust quickly the original production structure.

Under the circumstance of increased restraint from market demand and partly over-capacity, the priority task of economic growth is to readjust the original production structure so that it will fit the change in market demand. China has made great effort in this respect in recent years, they are followings: strategic readjustment in state economy, compressing over-productivity in industries such as textile and metallurgy, restraining the production of ""five-small"" enterprises, helping the state-owned enterprises out of difficulties, spontaneous restructuring of township enterprises and private economy according to market changes. Large amount of bad assets as well as large numbers of laid-offs and redundant workers in the course of readjustment will be difficult for the government and the society to handle within a short period of time. The pace of readjustment is thus restrained and the status of over-production and short of demand is prolonged. As a result, it will be difficult for economic growth to obtain a new starting point.

(2) New growth point can not expand rapidly.

Structural optimization and industrial upgrading require the support of market demand and innovative type of system and mechanism. The consumption structure of urban residents in China has experienced changes in recent years. New popular items for consumption, such as housing, automobile, telecommunication, travel, etc. are increasing. Market demand in this aspect is increasing accordingly. From a general point of view, however, the expenditure growth of the above items is not fast enough due to the restraint of income and family property status of the majority of Chinese residents. On the other hand, system and mechanism that support technological innovation and industrial upgrading are not complete. Especially the investment and financing system / mechanism, in which the government is the principal party and the state banks and policy financing are the main resources of funds, can not meet the demand for industrial innovation and upgrading, as it has little connection with performance of investment / financing activities and lacks the ability to bear the liability for all the losses incurred. All these show that it is difficult to speed up structural optimization and industrial upgrading. Urban economic development and the speed of urbanization of rural areas will be restrained. In addition, it is also very difficult for non-agricultural population in rural areas to move into cities, as it takes time to complete the readjustment process of land administration, household registration, urban construction and management. In general, the growth momentum in industrial upgrading and urbanization will not increase fast.

(3) Economic disorder is an outstanding problem.

Shift in economic growth mode and economic system has changed the original rules and arrangement of economy and led to readjustment in rules and order, which generates the problem of disorder. With the increasing difficulty in economic growth, employment and income growth, and loose rules and order, people’s economic behaviour were distorted under the pressure of making a living. For instance, some make profit by using state assets and then misappropriate state property. Some start to develop local economy by increasing investment and end up in developing local economy with local policies of protectionism. Some start to earn income by following economic rules but end up in breaking rules in order to make profit (i.e. tax evasion, cheating in tax payment, smuggling and counterfeiting, etc.). Government corruption has also become an outstanding problem. In summary, a lot of economic activities can not be included into the scope of economic rules in the course of development and system mode transformation. People pursue personal interest by all possible means and make use of the vacuum and leap-holes in economic systems and rules. The social economic order is thereby greatly challenged and results in trust crisis and credit crisis, posing a great threat to economic growth and social stability.

(4) Short-term aggregate policies have become a long term one, causing great difficulty in macro regulation.

The above analysis shows that the endogenous growth is weak at present. On the other hand, economic transformation is confronted with a series of contradictions, while it requires the economy to maintain growth rate. Thus short-term aggregate policies are necessary to stimulate growth continuously. At the same time, the government needs to increase its expenditure on raising income of residents, improving social securities, supporting agricultural production, etc.. As a result, the government expenditure has increased rapidly and debt burden has increased. The space for macro regulation has been decreasing with greater difficulties.

In general, in the course of profound social and economic transition, economic growth is mainly nagged by insufficient endogenous growth as well as the problem of economic disorder. Government’s macro regulation takes great responsibility while confronted with increasing difficulties. Thus we have a better understanding of, from a more complete point of view, how severe the situation was in the mid-1990s when China began to start the process of economic transformation and was challenged by the strong impact of Asian Financial Crisis.

4. Targets of regulation for the growth of transitional economy

Economic growth can be divided into two parts: maintenance growth and developmental growth. Maintenance growth refers to simple reproduction, i.e. aggregate growth when the structure remains unchanged. China has a large population, which grows at around 10 million each year, rural population and low-income urban population constitute a great proportion of the total and are growing each year. As a result, the basic demand for living grows steadily each year. There is a stable potential market for the expansion of general processing industry and production of traditional industries, although it is much smaller comparing with the previous rapid expansion and the excessively large production scale of the traditional industries.Some economists pointed out after making analysis that the maintenance growth rate of China’s economy is about 6%.(Professor Wang Jiye of the Economic Research Institute of the State Development Planning Commission specially analysed this subject in 1990 and came to the above-mentioned conclusion. His article""Research on Proper Economic Growth Rate for China""was published on the Social Sciences in China magazine in 1990.)Since the growth is based on the basic demand of people, it is of vital importance to achieve this growth level. Otherwise, the social and economic stability will be seriously affected. Regarding economic growth, we must, at the outset, guarantee that the economic operation is kept at a level higher than the maintenance growth level. This is the basic objective of macro economic policies.

Developmental growth refers to the growth in enlarged reproduction, which is growth achieved in the course of structural optimization and industrial upgrading. This is a weak part for economies that are undergoing systematic changes. The long term and basic target of economic policies is to speed up this growth, which is determined by the economic development mode and the process of systematic change.

In general, when economic growth is kept steadily at a level higher than the maintenance growth, the macro economic policies should focus on encouraging development growth. When the economy keeps growing at a level lower than the maintenance growth, the priority task is to prevent the slowing down of economic growth.

In summary, the economic growth in China at present is achieved in the course of profound social and economic changes, hence characterized by transitional features. Along with the completion of the social and economic changes, endogenous growth of the economy will continue to increase. Developmental growth will become an increasingly important part. In the pre-stage of the growth mode, endogenous growth will be weak and fluctuate greatly as influenced by exogenous elements. The growth is not stable. Therefore, the major task of macro economic policies is to guarantee that the economy grows at a level higher than the maintenance growth and to actively cultivate and strengthen the ability for development growth.

III. Analysis on China’s Economic Prospect in 2001

In general, China’s economy is still at the initial stage of the transitional period toward new development and system mode. However, the most turbulent and unstable period has passed. The economic development in 2000 is an obvious symbol. The reasons are as follows: The production structural readjustment has started and has made some initial achievement. Some new elements for growth are emerging in various industries and sectors, such as the fast developing industries of telecommunication, housing and automobile. Such elements are also emerging in enterprises of different ownership, such as, the state-owned enterprises of large and medium size have undergone their difficulties and reorganisation. The private sector receives more support in terms of government policies than before. Hence, the development ability for both the public and private sectors has increased, although to different extent. The state’s directional readjustment of macro economic policies has completed. Policies to stimulate internal demand have made obvious achievement. Enterprises and staff are beginning to adapt to market competition. The establishment of new systems and rules in several aspects are speeding up. All the efforts lead to better economic performance for enterprises, higher domestic demand and economic recovery. It should be pointed out that the basis for further recovery of economic growth is not solid. Readjustment of production structure is not completed yet. Over-productivity and excessive supply are continuing. New sources for economic growth, such as industrial upgrading and urbanization, are at the initial stage. The speed of expansion is low. No fundamental changes have taken place in the system and mechanism for investment and financing. As a result, the innovation and upgrading of industries are held back and non-governmental investment is restrained from flourishing. Economic disorder is serious, which is another important threat to the stability of economy. Rural economy continues to be confronted with great difficulties. The reform of state-owned enterprises and socialist market economic system are still under experiment and need to be improved. In short, the momentum for economic growth generated by economic development and the transformation of economic system continues to be weak. In addition, a lot of contradictions and unstable elements are still in motivation.

The driving force provided by reform is not strong enough for the development. The space for development provided by reform is limited. China’s economy and society are now in such a period that it is weak to endure any difficulties, namely the ability for economic growth to withstand external influences is weak, and the ability of the society and the public to withstand economic fluctuation and loss is also weak. In terms of the prospect of the reform and development of China’s economy, in terms of confidence and expectation for government decisions, it is now a particularly weak period. All these mean that we are still confronted with a significantly severe situation. It is now more difficult than any time before to correctly handle the relationship between reform, development and stability. Under such an environment, it is absolutely not allowed to make any mistakes in decision mak" Market Economy